"The bank regulatory system's reliance on Wall Street institutions to police themselves and voluntarily report misbehavior is a major flaw.
1. The New York Fed's investigators are surprisingly fearful and defensive.
They're called "regulators," although the proper title for the Fed officials who monitor America's banks is "supervisor." When it comes to protecting our economy, they're the cops on the beat. One of the striking things that these tapes make clear is that, rather than being forceful and assertive -- in other words, rather than "supervising" -- the Fed's staff is defensive, diffident, and afraid to antagonize the bankers they oversee...
This seems to reflect a culture that comes from higher up in the New York Fed.
It's a culture of submissiveness, not authority...
2. "Regulatory capture" is real -- and even worse than we thought.
...the fear that Fed officials display on these tapes, is a conspicuous example of "regulatory capture," a phenomenon in which the officials who oversee the banks become "captured" by the culture, values, and opinions of the bankers they're supposed to regulate.
Much of that capture is due to the fact that the only well-paying jobs available to ambitious regulators are frequently with the banks themselves...
...4. Self-policing doesn't work.
One of the great flaws in our bank regulatory system is its reliance on Wall Street institutions to police themselves and voluntarily report misbehavior to the proper authorities. The massive crime wave that led to the 2008 financial crisis demonstrated rather conclusively that these institutions are, as a rule, somewhat disinclined to do so.
...If the regulators themselves don't think that disclosure is a requirement for bankers, why would the bankers themselves?
5. The Fed's governance structure is broken.
...The Fed and its branches, which were created by the United States government, is run by boards largely composed of bank executives and their corporate allies...
As a central bank, the Fed is a governmental institution that provides banks with vast financial resources -- supposedly in return for compliance with government policies. But when bankers sit on its boards, it has powerful incentives not to look very carefully at its level of compliance...
6. Senators Warren and Brown are right. We need public hearings.
Senators Elizabeth Warren and Sherrod Brown reacted to the Segarra tapes by calling for public hearings into the New York Fed's actions. "It's our job to make sure our financial regulators are doing their jobs," said Warren, who added:
"When regulators care more about protecting big banks from accountability than they do about protecting the American people from risky and illegal behavior on Wall Street, it threatens our whole economy..."